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The simple analytics of money and credit in a quasi-linear environment

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  • David Andolfatto

Abstract

Lagos and Wright (2005) demonstrate how the essential properties of a money-search model are preserved in an environment that is rendered highly tractable with the use of quasi-linear preferences. In this paper, I show that this same innovation can be applied to closely related environments used elsewhere in the literature that study insurance and credit markets under limited commitment and private information. The analysis demonstrates clearly how insurance, credit, and money are interrelated in terms of their basic functions. The analysis also leads to a heretofore neglected result pertaining to the Friedman rule. In particular, I find that the same frictions that render money essential may at the same time operate to render the Friedman rule infeasible. Thus, even if the Friedman rule is a desirable policy, an incentive-induced lower bound on the rate of deflation may nevertheless entail a strictly postive rate of inflation.

Suggested Citation

  • David Andolfatto, 2011. "The simple analytics of money and credit in a quasi-linear environment," Working Papers 2011-038, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2011-038
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    File URL: http://research.stlouisfed.org/wp/2011/2011-038.pdf
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    References listed on IDEAS

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    1. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, August.
    2. Stephen Williamson & Daniel Sanches, 2008. "Money and Credit with Limited Commitment," 2008 Meeting Papers 502, Society for Economic Dynamics.
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    Cited by:

    1. Daniel, Sanches, 2011. "A dynamic model of unsecured credit," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1941-1964, September.
    2. Francesca Carapella & Stephen Williamson, 2015. "Credit Markets, Limited Commitment, and Government Debt," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 963-990.
    3. Dong, Mei & Jiang, Janet Hua, 2010. "One or two monies?," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 439-450, May.
    4. Andolfatto, David, 2008. "Essential Interest-Bearing Money (2008)," MPRA Paper 8565, University Library of Munich, Germany.

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    Keywords

    Money ; Credit;

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